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Why the Shanghai Index Should Be in Your Sights


A look at which Chinese companies could prosper should Shanghai hit the wires with unexpected news.

As most traders already know, a sneeze in Greece can cause a cold in the United States. Global economies are so interchangeably linked that it's impossible to trade in one venue without appreciating the impact that other world markets may have on your setups and strategies. I wanted to highlight this for you today with a key index that may be missing from many traders playbook, and one I would suggest gets a closer look: Shanghai Stock Index

The Shanghai Stock Index (SSEC-X) is based in mainland China, and isn't open to foreign investment. Companies that list on the Shanghai Stock Index are China nationals, and therefore this index is an excellent gauge of what is truly happening in the turbo-boosted Chinese economy.

Many times, traders take a look at what the Hang Seng Index (HKHS-X) has done overnight and assume this is the "Chinese market". Based in Hong Kong, the Hang Seng is a more encompassing index of companies trading on the Hong Kong stock exchange, whereas the Shanghai Index will drill down right to mainland China. I would posit that traders need to keep an eye on the Shanghai Stock Index to really hear how the Chinese economic engine is purring.

Case in point: Last night the Hang Seng was off 1.44%, which in itself was a haircut. If you switch over to the Shanghai Stock Index you'll see that it was off by almost 2.40%. This tells me that something is brewing under the surface with mainland China, and volatility should be watched closely. If this sneeze hits our shores, traders better be ready to grab the Nyquil.

Chinese companies -- such as Baidu (BIDU), China Agritech (CAGC), The9 Limited (NCTY), and Shanda Interactive Entertainment (SNDA) -- that trade on US exchanges may be some of the first to move when Shanghai news comes rolling in. Let's take a look at several of these Chinese companies that could prosper should Shanghai hit the wires with unexpected news. Clearly, I wouldn't be shorting the strength of companies like Baidu and China Agritech, but others are clearly setting up to take advantage of a market shake-up in either direction. I'll highlight two shorts, two longs, and one hanging on the fence.

Short Players

Shanda Interactive

Shanda Interactive has been in a downtrend for the past 12 months, so even the least bit of negative news out of China may set the downward roller coaster in high gear. Support at $40.50 has been broken, and momentum is a trader's friend. Nestled way below the 50 MA, a slight uptick could be expected, but traders shouldn't try to catch this falling safe. If it consolidates here first, it might provide a good shorting opportunity. I wouldn't chase it to the downside.

The9 Limited

Another entertainment issue, The9 Limited is a stock that appears to have run out of steam. From a high in the 40s in mid-2007, this train hasn't seen the station since and has been rolling toward a grinding halt in the single digits. At this juncture, I would take no action on The9 Limited. A potential double base has formed, which might provide some upside, but there are too many months of resistance for The9 Limited to fight through to make me put any money on this dog. Most of the short money has been pocketed, and we may have a laggard on our hands going forward.
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No positions in stocks mentioned.

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